The Trump trade war with China is hurting the United States economy more than China’s economy, according to Fortune. Trump’s original plan was to inflict economic pain, through the use of tariffs, on China that would cause them to submit to his demands.
Unfortunately, the latest economic data says otherwise. The ISM Purchasing Managers Index (PMI) was released on October 2 and recorded the lowest levels of activity in U.S. manufacturing since the great recession over a decade ago.
To compare the effect of the trade war on each country's current and future GDP, two factors are considered. The first is the drop in exports from each nation. The second is the extra cost each country is paying to outsource goods from other countries that they used to buy from each other, referred to by economists as deadweight cost.
China’s GDP is currently $14 trillion and is growing at an inflation-adjusted rate of 6.2 percent. If this growth rate continues, the economy will produce an additional $865 billion in goods and services in 2019. Without the tariffs on Chinese imports into the U.S., the growth rate would be 6.6 percent. This results in a $55 billion loss in exports or a .4 percent loss for China.
The U.S. GDP is currently $19.39 trillion and in 2020 is predicted to grow at an inflation-adjusted rate of 2 percent. If the predicted growth rate is correct, the U.S. will produce an additional $390 billion in goods and services in 2020. Due to the tariffs, China is placing on U.S. imports, the U.S would lose approximately .1 percent of its predicted national income.
So far so good for Trump’s trade war, right? Wrong. The GDP comparison is only the first factor. The second factor, deadweight cost, is killing the U.S.
China’s strategy has been to only tax imports from the U.S. that it cannot purchase at the same cost from Vietnam, Japan, Canada or another country. This allowed China to expose its 1.4 billion consumers to other countries. This strategy led experts to project a deadweight cost of $0 to China.
On the contrary, the U.S. has imposed tariffs on nearly all Chinese goods. This has lead the U.S. to increasingly source imports for the same products from Vietnam, Singapore, and EU nations, at higher costs. Essentially, the U.S. is paying more for the same goods and as a result, the deadweight costs directly impact GDP growth dollar for dollar, equal to the difference. Around the time when tariffs were imposed on around half of Chinese imports, the deadweight cost was $80 billion. Now, there are tariffs on nearly all Chinese goods and the hit is projected at $160 billion in 2020 or .9 percent of projected GDP.
The damage to China from loss of exports to the U.S. is .4 percent, and 0 percent for deadweight costs, for a total of .4 percent. For the U.S. the tally is .1 percent from lost exports to China, and .9 percent from deadweight costs. Trump claims his trade war is hurting China, but the facts say otherwise.